April 21, 2023
By Steve Blumenthal

Donnie Brasco is a 1997 crime drama directed by Mike Newell starring Johnny Depp and Al Pacino. The film is based on the true story of an FBI agent named Joe Pistone (played by Depp), who goes undercover as a jewel thief with the alias “Donnie Brasco” to infiltrate the Bonanno crime family in New York City in the 1970s.

Throughout the film, many characters use the phrase “forget about it”—particularly Al Pacino’s character, Lefty Ruggiero, a low-level member of the Bonanno family who takes Brasco under his wing. Often used lightheartedly as a way of saying, “don’t worry about it” or “it’s not a big deal,” there is one scene in which Lefty explains the hierarchy of the mafia to Brasco and dismisses the idea that Brasco could ever rise through the ranks. “Forget about it, Donnie,” he says. “You’re out of your depth.”

Looking at the bond market these days has me repeating this line in my head: Forget about it. The prospects for buying and holding bonds do not look good.

The macroeconomic picture today is loaded with risks. Here’s a selection:

• We’ve reached the end of a 75-year long-term debt accumulation cycle. Debts are massive and are a headwind to growth and rising interest rates. Ahead of us—likely in the second half of the decade—sits a restructuring of sovereign debts for Europe, the U.S., and almost everywhere else (Japan, China, etc.). There are, of course, exceptions.
• The right solution is to save more, spend less, and, dare I say, tax more. (Will anyone elect a politician running on that policy?) The probable outcome is a balance of deflationary forces, like aging demographics and debt, with inflationary policy, such as printing money to cover government spending, monetizing government debts, and bailing out systemically important companies when they break and allowing others to fail. The process is unlikely to be orderly.
• Inflation is the kryptonite to easy money policies. I believe we are on the back end of inflation wave number one.

A recession in the fall is likely. When the next recession comes, the Fed and other governments will presumably roll out more goodies and give a lift to equity markets—perhaps to new highs. Ultimately, it will lead to higher interest rates and another round of inflation.

• The Fourth Turning—geopolitical risks are significant and concerning. Tensions are high with a rising power (China) challenging the existing power (U.S.). Taiwan may be the tipping point.
• Deflationary global trade/harmony is at risk. This is inflationary in terms of costs. AI and robotics may help keep manufacturing costs down. Partnering with more friendly partners may also help.
• Near term: Higher interest rates and high inflation are slowing the economy. The good news is, this will bring inflation down.
• This brings us to the most important pricing mechanism in the global economic system: U.S. Treasury yields. And the story about Donnie Brasco.
• The secular bond bull market that began in 1984 ended in 2022. Treasury yields went from 14.50% to 0.40% (2020). As indicated in the following chart, we’re in a new secular bear market for bonds. The technical break above the 200-month moving average in early 2022 is meaningful. (Refer to the chart below.)
• Bottom line: As for buying and holding bonds? “Forget about it, Donnie.”

10-year Treasury Yield Index (1982 – present)

Here’s how to read the chart:

• Pictured is the 10-Year U.S. Treasury Yield Index from 1982 to the present.
• Note the long period of lower lows and lower highs in yields.
• In early 2022, that trend changed.
• The blue line plots the 200-month moving average.
• The lower MACD section plots a 12-month moving average(black line) vs. a 26-month moving average (red line).
• Bullish signals occur when the shorter-term black line crosses below the longer-term red line. Sell signals occur when the black line crosses above the red line.
• The orange circle marks a nearing bullish buy signal, signaling lower rates.

 

I just can’t see how a 3.57% yield in a 5%, or even 3%, inflation world makes sense. But that doesn’t mean there isn’t an opportunity in bonds. If the long-term secular bull market (rates moving lower) is over, active trading and risk management should be favored over passive buy-and-hold. For example, a decline in interest rates back down to the 200-month moving average line from the current 3.57% yield to 2.58% (noted in the far right of the chart) equates to a gain of approximately 25%. Just know that if rates should rise back up to the recent high of 4.33%, it would equal a loss of approximately 18%. And please know this is not a recommendation for you to do anything. Just painting the picture of the reality in which we find ourselves.

The same goes for equities. As I wrote a few weeks ago in On My Radar, valuations are better, but still very high, which means the coming 1-, 3-, 5-, 7-, 9-, and 10-year total returns for the S&P 500 Index are likely to be between -2% and +2% annualized. Factor in inflation, and the conclusion is to seek other investment opportunities. There are many.

Grab a coffee and find your favorite… Scratch the chair this week—plug in your headphones, grab your sneakers, and head out for a walk instead. Click on the link below to listen to my podcast episode with CMG’s Brian Schreiner, where we discuss current market valuations, what they tell us about coming returns and a few ideas on other ways to invest. In that same direction, I also provide you with a link to an excellent podcast about venture capital. You’ll learn a few things about investing—that I can guarantee.

Here are the sections in this week’s On My Radar:

• On My Radar Podcast Discussion on Current Market Valuations
• Moonshots and Mindsets Podcast – Peter Diamandis and Dakin Sloss
• Random Tweets
• Trade Signals: HY Indicators Nearing Sell
• Personal Note: Golf, Austin, Penn State, and NYC

(Reminder: This is not a recommendation to buy or sell any security. My views may change at any time. The information is for discussion purposes only.)

Why you may want to listen to this podcast?

• This is a podcast about getting rich investment opportunities… what to look for, how to find them, what questions to ask, and where Peter and Dakin are focusing their time, attention, and money. 
• For investors, stewards of capital, and me personally, this is a really fun part of the investment business. Of course, the risk of loss is great, so size the best appropriately.  

Peter H. Diamandis is the founder and executive chairman of the XPRIZE Foundation, which leads the world in designing and operating large-scale incentive competitions. He is also the executive founder of Singularity University, a graduate-level Silicon Valley institution that counsels the world’s leaders on exponentially growing technologies. As an entrepreneur, Diamandis has started over 20 companies in the areas of longevity, space, venture capital, and education. He is co-founder of BOLD Capital Partners, a venture fund with $250M investing in exponential technologies, and co-founder and Vice Chairman of Celularity, Inc., a cellular therapeutics company.

Dakin Sloss is an entrepreneur, investor, and philanthropist. He is the Founder and General Partner of Prime Movers Lab, the world’s leading partner of breakthrough scientific startups. He has led investments in transformative companies, including Tarana, Halo, Carbon Capture, Focused Energy, Gilgamesh, Paradromics, Vaxxinity, Diamond Age, E-Space, Space Perspective, and Boom.

I listened to it on my way to Stonewall and back. It is excellent! Hope you enjoy it as much as I did. 

Click on the photo to get to the podcast.

 

 

Talk to your advisor. Ask her about short-term private credit, well-collateralized short-term private credit interval funds, specialty lending funds (for accredited investors), long/short mutual funds (and LP’s if an accredited investor), high and growing dividend-paying value stocks, active stock managers targeting highest conviction ideas, disruptive technologies, agriculture, farmland, genomics, and AI. For my personal money, I just don’t see the current opportunity in buying and holding low-cost stock and bond index funds. Not until after valuations reset. It will present after the next major market dislocation. I have no idea when that might be. 

No Random Tweets this week. Rushing to finish the post, and my edit team is waiting—more next week.

(Reminder: This is not a recommendation to buy or sell any security. My views may change at any time. The information is for discussion purposes only.)

If you are not signed up to receive the free weekly On My Radar letter, you can subscribe here.

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Trade Signals: HY Indicators Nearing Sell 

If you are a Trade Signals subscriber, click on the “LOGIN” link below to view the most recent post. If you are not yet subscribed, you can join the Trade Signals tribe by clicking on the SUBSCRIBE link below. Please email me at blumenthal@cmgwealth.com if you’d like a sample of this week’s Trade Signals or have any questions.

About Trade Signals

Trade Signals provides a weekly snapshot of current stock, bond, currency, and gold market trends. We provide a summary of technical indicators to help you identify where we sit in short, intermediate, and long-term cycles. We track important valuation metrics to determine the probability of future returns (i.e. when return opportunity is best/least). Trade Signals also tracks investor sentiment indicators and economic and select recession watch indicators. Trade Signals is now a low-cost subscription service, about the cost of two Starbucks lattes every month. You can find the archive of weekly Trade Signals posts (2008 through 2-15-23) by clicking here.

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Not a recommendation for you to buy or sell any security.  For information purposes only.  Please discuss needs, goals, time horizons, and risk tolerances with your advisor. Investing involves risk. You can lose some or all of your money.

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Personal Note: Golf, Austin, Penn State, and NYC

The weekend weather here in the Philadelphia area is supposed to be in the mid-70s on Saturday, dropping down to the low-60s on Sunday. OK golf weather. Susan will be coaching, and I’ll be heading to Stonewall to play golf with my good friend Wade. We met years ago when our daughters were five, and that began a wonderful journey for our kids and us. We blinked, and the girls are now 30. Time is moving way too fast. Ever forward!

Wade and I have a standing bet, which plays out over the course of each season, involving the movement of money from my pocket to his and his pocket to mine. I hope tomorrow concludes with cash moving from his pocket to mine. Really it’s more about bragging rights, fun competition, and enjoying the time together. (Except for tomorrow, it’s about the money. 😊)

Austin, Texas, is up next on the docket, April 29 to May 1, for an advisor meeting and time with good friends. Then, on May 6, I’ll head to Penn State for a screening of my son Kyle’s short film titled, Pray for Me. It is about suicide prevention and awareness. He wrote, directed, and acted in the film, and I couldn’t be prouder. I’ll follow that up with a trip to NYC for meetings and a dinner on May 9.  

Hope you, too, have fun plans for this weekend and the weeks ahead.

Kind regards,

Steve

Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
Private Wealth Client Website – www.cmgprivatewealth.com
TAMP Advisor Client Webiste – www.cmgwealth.com

If you are not signed up to receive the free weekly On My Radar letter, you can sign up here. Follow me on Spotify, Twitter @SBlumenthalCMG, and LinkedIn.  

Forbes Book – On My Radar, Navigating Stock Market Cycles.  Stephen Blumenthal gives investors a game plan and the advice they need to develop a risk-minded and opportunity-based investment approach. It is about how to grow and defend your wealth. You can learn more here.

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Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management.

Follow Steve on Twitter @SBlumenthalCMG and LinkedIn.

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